The Interplay of Public and Private Debts: Evidence on Business Cycles and Growth

Private credit and public debt levels have reached unprecedented levels in many economies. This paper examines their joint dynamics over multiple horizons, focusing on a sample predominantly composed of high-and upper-middle-income countries with relatively mature financial systems. Using disaggregated data on debt recipients from 1970 to 2018, the analysis shows that treating private credit and public debt in isolation masks important interactions. At the business cycle frequency, credit-intensive expansions are a key precursor to financial distress and slower recoveries, with high public debt at the onset of a crisis further amplifying these effects by constraining fiscal space. At the medium-run horizon, the results are consistent with a trade-off between the growth benefits of financial deepening and rising macro-financial vulnerabilities: private credit supports growth at lower levels of financial development, but its contribution diminishes-and can turn negative-as economies become more financially advanced. The adverse effects of private credit surges are compounded by high public debt, offering new insight into why financial expansion may fail to sustain long-term growth under certain macroeconomic conditions. This adverse medium-run association is largely conditional on crisis episodes and credit composition, particularly household credit.